FIN 300 Exam 2
What is the minimum face value of a treasury bond?
$1000
You purchase a bond with an invoice price of $1,028. The bond has a coupon rate of 7.5 percent, and there are four months to the next semiannual coupon date. Assume a par value of $1,000. What is the clean price of the bond?
$1015.50
A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?
$19.57
RAK, Inc., currently has an EPS of $1.20 and an earnings growth rate of 5 percent. If the benchmark PE ratio is 17, what is the target share price five years from now?
$26.04
Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?
$26.42
A newly issued 10-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding.
$38.53
A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?
$5073.11
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.40, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?
$57
You purchase a bond with a coupon rate of 8.7 percent and a clean price of $870. Assume a par value of $1,000. If the next semiannual coupon payment is due in two months, what is the invoice price?
$899
Flex Co. just paid total dividends of $875,000 and reported additions to retained earnings of $2,625,000. The company has 635,000 shares of stock outstanding and a benchmark PE of 16.5 times. What stock price would you consider appropriate?
$90.94
What are three levels of info access for the NASDAQ?
(1) Free price quotations, (2) small fee for inside quotes, (3) Exclusive use of market makers only
What is the formula for accrued interest?
(Coupon payment for period) - (Days since last period / Days in period)
How do you calculate the present value of a stock?
(D1 + P1) / (1 + R)
What is the formula for required return?
(D1/P0) + g
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as
0.05/(1-t*) = 0.07
The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?
10.86%
World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?
12.537
How many, and which type of, companies are included in the NASDAQ Global Select market?
1600 large companies
The next dividend payment by Savitz, Inc., will be $1.96 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $39 per share. What is the capital gains yield?
4%
A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?
4.84%
The next dividend payment by Savitz, Inc., will be $1.96 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $39 per share. What is the dividend yield?
5.03%
New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?
5.18%
When do we usually see an inverted yield curve?
6-18 months before a recession
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?
7.22%
Global Exporters wants to raise $31.3 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 5.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding.
73225
Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?
8.62%
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate?
8.78%
How many, and which type of, companies are included in the NASDAQ global market?
810 small-medium companies
How many, and which type of, companies are included in the NASDAQ capital market?
820 of the smallest companies included in the NASDAQ
The taxability risk premium compensates bondholders for what?
A bond's unfavorable tax status
U.S. Treasury bonds are quoted as...
A percentage of par
Why is interest rate risk impacted by time to maturity?
A small change in the interest rate over a longer period will have a much greater impact on returns because of compounding
Medium grade bonds include ________ and ________.
A, BBB
What is the highest rating a bond can have?
AAA
What bonds are considered investment grade?
AAA - BBB
High grade bonds include _____ and ______.
AAA, AA
A note is generally defined as...
An unsecured bond with an initial maturity of 10 years or less.
How do you find the coupon rate?
Annual coupon / face value
How do you find current yield?
Annual coupon / price
Which formula do you use to find the present value of the coupons on a bond?
Annuity formula
This value is the price that the dealer (issue) is willing to ACCEPT for a bond.
Ask price
The business of the NYSE is to...
Attract and process order flow
What bonds are considered junk bonds?
BB - D
This value is the price that the dealer (issuer) is willing to PAY for a bond.
Bid price
This is the ask price - bid price, and represents the dealers' profit.
Bid-Ask spread
Who decides whether / how much to pay dividends?
Board of directors
Usually an interest-only loan (borrower pays only the interest until fully paying back the principal amount at the end of the period)
Bond
What is the relationship between YTM and bond value?
Bond prices and market interest rates (YTM) move in opposite directions.
These are the assessment of the creditworthiness of an issuer.
Bond ratings
How are debt and equity different?
Bondholders are not entitled to vote.
Which is greater, the number of bond issues or the number of stock issues?
Bonds
Why do investors demand a liquidity premium?
Bonds are less liquid than other assets, and this makes them less desirable.
Why is interest rate risk impacted by coupon rates?
Bonds with lower coupon rates have lower cash flows at the beginning, and are more dependent on the face value.
An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
Broker
__________ do not own stock, but rather bring together buyers and sellers without maintaining an inventory.
Brokers
This is the difference between the call price and the par value (typically the call price is greater than the par value)
Call premium
What type of provision can protect bondholders from having their bonds called within the first few years of their life?
Call protected
This allows companies to repurchase part of the bond issue at stated prices
Call provision
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
WHICH HAS HIGHER COUPON: A callable bond or a non-callable bond?
Callable bond
Aaa/AAA examples: Sovereign debt from _______ or __________, firms such as __________ or ____________.
Canada, Germany, Johnson & Johnson, Microsoft
The difference between the purchase price and the selling price
Capital gains
________________ create different types of shareholders, where some may have a multiplier effect on their voting power (for example, 4 votes per share instead of 1:1)
Classes of stock
This is the price of a bond sold between coupon payments that does not include accrued interest.
Clean price
_________ are assets pledged on debt; secured by financial securities
Collateral
This stock has no special preference, either in receiving dividends or in bankruptcy.
Common stock
(Creditors/Common stockholders) have voting rights for the BoD and other issues
Common stockholders
The dividend growth model is also known as...
Constant growth
Regular payments on a bond made by the borrower
Coupons
This risk, of corporations/muni bonds, is the possibility of default.
Credit risk
In this type of voting, the total number of votes that each shareholder may cast is determined first. It is usually the number of shares x the number of directors to be elected.
Cumulative voting
This type of voting encourages minority participation.
Cumulative voting
What is the lowest rating a bond can have?
D
Who came up with "Growth Theory" that helps to explain income inequality?
David Ronmer
An agent who maintains an inventory from which he or she buys and sells securities is called a:
Dealer
________________ buy securities and then sell them as needed; they maintain their own personal inventory of securities.
Dealers
Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
Debenture
This is an unsecured bond
Debenture
WHICH HAS HIGHER COUPON: Secured debt or a debenture?
Debenture
____________ are unsecured debts with original maturity OVER ten years.
Debentures
DEBT VS. EQUITY: Creditors have legal recourse if interest or principal payments are missed ("default")
Debt
DEBT VS. EQUITY: Excess _________ can lead to financial distress and bankruptcy
Debt
DEBT VS. EQUITY: Interest is considered a cost of doing business and is tax deductible.
Debt
What are three characteristics of US Treasury bonds?
Default free, taxable, and highly liquid
Which premium is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?
Default risk
What are three premiums associated with non-US Treasury bonds?
Default risk premium, taxability premium, liquidity premium
Because of this, call provisions sometimes aren't operative for the first few years.
Deferred call provisions
What are three types of license holders that trade stock?
Designated market makers, floor brokers, and supplemental liquidity providers
These people act as "specialists"; they act as dealers in particular stocks; they post bids and ask prices.
Designated market markers
Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Electing the board of directors Receiving a distribution of company profits Voting either for or against a proposed merger or acquisition Determining the amount of the dividend to be paid per share Having first chance to purchase any new equity shares that may be offered
Determining the amount of the dividend to be paid per share
What is the formula for clean price?
Dirty price - accrued interest
This is the price you pay for a bond purchased between coupon payments, which includes accrued interest.
Dirty/invoice/cash price
This sells for less than par value
Discount bond
The cost of capital is also known as the...
Discount rate
Where should you start when finding the present value of a two-stage growth stock valuation?
Discounting the final phase of cash flows
What are three special considerations / assumptions that could apply to stock valuation?
Dividend with 0 growth rate, dividend with constant growth rate, dividend with constant growth rate after the end of some period.
What does (D1/P0) stand for in the required return formula?
Dividend yield
What is the formula for required return?
Dividend yield + capital gains yield
What are the two components of required return?
Dividend yield and capital gains yield
Thee are not like interest; they can be paid, or not, in varying amounts.
Dividends
This is a return on capital directly or indirectly contributed to the corporation by shareholders.
Dividends
What are the two ways that stockholders can expect to receive cash?
Dividends and selling stock (capital gains)
The real rate of interest (does/does not) influence the shape of the term structure.
Does not
An inverted yield curve is _________ sloping.
Downward
If the long term interest rate is lower than the short term interest rate, then the term structure is _________
Downward sloping
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
These allow investors to trade directly with one another; they open up the NASDAQ.
Electronic Communication Networks
DEBT VS. EQUITY: Dividends are not a liability or the firm, and stockholders have no legal recourse if dividends are not paid
Equity
DEBT VS. EQUITY: Dividends are not considered a cost of doing business and are not tax deductible.
Equity
DEBT VS. EQUITY: Which gives holders voting rights?
Equity
DEBT VS. EQUITY: Which is an ownership interest?
Equity
To value a differential growth stock...
Estimate future dividends in the foreseeable future Estimate the future stock price when the stock becomes a constant growth stock Compute the total present value of the estimated future dividends and future stock prices
A floor broker on the NYSE does which one of the following? A. supervises the commission brokers for a financial firm B. trades for his or her personal inventory C. executes orders on behalf of a commission broker D. maintains an inventory and takes the role of a specialist E. is charged with maintaining a liquid, orderly market
Executes orders on behalf of customers
One top of the real rate of interest, there are five premiums to consider. These are...
Expected future inflation, default risk, taxability, interest rate risk, and lack of liquidity
Investors in a zero-dividend stock pay the stock price based on the...
Expected growth rate
The amount to be paid back at the maturity date on a bond.
Face value / par value
What is it called when a company's bonds go from investment grade to junk bonds?
Fallen angel
(T/F) Dividends received by shareholders are not taxable
False
(T/F) Preferred stockholders can always vote.
False
(T/F) The dividend growth model works in valuing firms with no dividend.
False
(T/F) The term structure of interest rates and the time to maturity are always directly related.
False
(T/F) Zero coupon bonds can be sold for more than par value
False
T/F: US Treasury bonds have all of the same characteristics as other bonds
False
This is the relationship between nominal rates, real rates, and inflation
Fisher effect
These have adjustable rates that are tied to interest.
Floating rate bonds
These people execute trades for customers, and focus on getting the best prices.
Floor brokers
In special cases, it is possible to calculate the present value of all _________, and find the value of a stock.
Future dividends
The cash flow of owning a share of stock comes in the form of...
Future dividends
The rate of inflation affects term structure because...
Future inflation erodes the value of the money to be returned, so investors demand higher compensation in the form of higher nominal rates.
What three markets make up the NASDAQ?
Global select, global, capital
These bonds are issued by the government
Government bonds
__________ firms like _________ believe their earnings are better used to pursue growth than to be paid out as dividends, and they tend to have ___________ payouts.
High-growth, Microsoft, zero to low
Moody's C and S&P C and D
Highly uncertain repayment and, in many cases, already in default with principal and interest in arrears.
Real rates are defined as nominal rates that have been adjusted for...?
Inflation
This is what investors demand when future inflation rates might erode the value of the money that will be returned to them.
Inflation premium
What is the distance between the middle line on the term structure curve and the lower line?
Inflation premium from the expectation of inflation
What is on the vertical axis of a term structure graph?
Interest rate
This depends on how sensitive price is to interest rate changes.
Interest rate risk
What is the distance between the top line on the term structure curve and the middle line?
Interest rate risk premium
Interest rates are _____ related to present values (prices)
Inversely
Before a recession, there is typically a (normal/inverted) yield curve.
Inverted
Why does the real rate of interest impact term structure?
Investors demand compensation for forgoing the use of their money; it's the pure time value of money after adjusting for the inflation.
How do you find the yield to maturity on a WSJ Treasury bonds and notes table?
It is equal to the "asked yield"
If a problem refers to a dividend, what should you assume about that dividend?
It is paid per share.
Why might a company want to use straight voting or stagger their BoD elections?
It makes takeover attempts less likely to vote in a majority of new directors.
What two conditions must exist if a company is to grow?
It must not pay out all of its earnings as dividends all the time, and it must invest in good projects
These are bonds rated below investment grade
Junk bonds
When interest rates go up, bonds are worth (less/more)
Less
The return on US federal debt is ______________ return on best rated corporate bonds
Less than or equal to
These are required for orders not handled electronically.
License holders
Which of the risk premiums compensates for the inability to easily resell a bond prior to maturity?
Liquidity
What is the impact of interest rate risk on term structure?
Long term bonds have a higher risk of loss resulting from changes in interest rates than shorter term bonds, so investors demand a higher price for longer-term bonds.
Which bond would you generally expect to have the highest yield? 1) Risk free treasury bond 2) Nontaxable, highly liquid bond 3) Long-term, high quality, tax-free bond 4) Short-term, inflation-adjusted bond 5) Long-term, taxable junk bond
Long-term, taxable junk bond
When companies __________ in a call, investors are paid back the amount approximate to what they're worth if they're called.
Make whole
The coupon rate is equal to the...
Market interest rate hen issued
What are two entities that issue bond ratings?
Moody's, S&P
Stock is (more/less) difficult to value than bonds.
More
When interest rates go down, bonds are worth (less/more)
More
__________ are secured by real property, usually land or buildings
Mortgages
What method is appropriate for valuing a firm with no dividend?
Multiples
How can you compare taxable bonds to munis?
Muni rate is what it says, and taxable bond rates are what they say minus your tax rate.
These are for state and local borrowing and have various risk of default.
Municipal notes
These bonds are exempt from federal income taxes.
Municipal notes
This is the second largest stock market in the US; it is nonphysical and has multiple market makers rather than a DMM system
NASDAQ
Members of the ________ must purchase trading licenses to trade.
NYSE
The two biggest stock markets in the US are the...
NYSE and NASDAQ
What does NASDAQ stand for?
National Association of Securities Dealers Automated Quotations
This type of protective covenant tells a firm not to do something, such as issue additional debt, merge with another firm, etc.
Negative covenant
Is the payment of dividends considered an expense?
No
Is the payment of dividends deductible?
No
What does "R" stand for in the Fisher effect formula?
Nominal rate
___________ are unsecured debts with original maturity UNDER ten years.
Notes
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?
OTC market
NASDAQ prefers people not use the term _______...but people still do!
OTC market
This securities market is largely characterized by dealers who buy and sell securities for their own inventories.
OTC market
WHICH HAS HIGHER COUPON: A bond with a sinking fund or one without?
One without
How are stock prices reported?
Online or in print
_______ refers to the flow of customer orders to buy and sell stocks.
Order flow
In a zero-growth dividend, what formula do you use to find the present value of the stock?
Ordinary perpetuity formula (P = D/R)
The secondary market is best defined as the market where...
Outstanding shares of stock are resold
For a constant-growth dividend, what formula do you use to find the present value at some point in time?
PV = Dt / (R-g)
Some corporations have preferred stock, and the owners of these stocks must be...
Paid first with a fixed dividend
What is an electronic system used by the NYSE for directly transmitting orders to DMMs?
Pillar system
"__________" bonds are non-convertible and non-callable.
Plain-vanilla
This type of protective covenant specifies an action a company must take or a condition the company must abide by.
Positive covenant
___________________ means that companies must offer their stock to existing stockholders before offering it to the general public.
Preemptive right
This often carries credit ratings, is sometimes convertible into common stock, and may be callable.
Preferred stock
This type of stock differs from common stock because it has preference over common stock in the payment of dividends and distribution of corporate assets in the event of liquidation.
Preferred stock
Who has preference in the payment of dividends and distribution of corporation's assets in the event of liquidation?
Preferred stockholders
This sells for more than par value
Premium bond
Which formula do you use to find the present "lump sum" value (aka, not including coupons) of a bond's face value?
Present value formula
The present value of a bond is equal to the...
Present value of coupons + present value of par value
Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?
Primary
This market is where companies sell securities to raise money as a new issue.
Primary market
Stock market reporting is increasingly moving form ________ to ________.
Print media, digital media/websites
These are part of an indenture/loan agreement that limits certain actions a company might otherwise take during the term of the loan
Protective covenants
Most voting in shareholder meetings is done by...
Proxy
This is the transferring of authority by a shareholder to someone else to vote for his or her shares; it is common in large corporations.
Proxy
What are the three components of term structure?
Real rate of interest, rate of inflation, and interest rate risk.
The coupon rate depends on the ______________ when issued.
Risk characteristics of the bond
This market is where existing shares of securities are traded among investors.
Secondary market
Preference in position over other lenders (junior, subordinated, senior etc)
Seniority
What are 3 rights of common stockholders?
Share proportionately in dividends paid, share proportionately in assets remaining after liabilities have been paid in a liquidation, and vote on stockholder matters of great importance, like mergers, usually at an annual or special meeting.
____________ have certain rights, including voting in elections.
Shareholders
As the economy comes out of recession, we typically see a ___________ yield curve.
Sharply increasing
This is an account managed by the bond trustee for the purpose of repaying the bonds
Sinking fund
There are two types of voting in shareholder meetings:
Straight or cumulative
In this type of voting, one director is elected at a time, and the only way to guarantee a seat is to own over half of the shares.
Straight voting
WHICH HAS HIGHER COUPON: Subordinated debenture or senior debt?
Subordinated debenture
These are investment firms that agree to be active participants in stocks assigned to them, purely for their own accounts.
Supplemental liquidity providers
Pure bonds with original maturity of one year of less
T-bills
coupon debt with original maturity greater than 10 years
T-bonds
coupon debt with original maturity between one and ten years
T-notes
The _______________ offers higher yields to bonds that are taxable.
Taxability premium
This is the relationship between short and long term interest rates; it tells us the pure time value of money for different lengths of time.
Term structure of interest rates.
_____________ is based on pure discount bonds, while ___________ is based on coupon bond yields.
Term structure, yield curve
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?
The YTM is less than the coupon rate.
What are three reasons that make stocks harder to value than bonds?
The cash flows aren't known, the life of the investment is essentially forever, and there's no way to easily observe the rate of return that the market requires.
What does the YTM on a zero-coupon bond come from?
The difference between purchase price and par value
All else equal, what is the relationship between time to maturity and interest rate risk?
The greater the time to maturity, the greater the interest rate risk
All else equal, what is the relationship between the coupon rate and the interest rate risk?
The lower the coupon rate, the higher the interest rate risk
What does the real rate represent?
The percentage change in how much you can buy with your money; the percentage change in your buying power.
What does the nominal rate represent?
The percentage change in the number of dollars you have
What is interest rate risk based on?
The time to maturity and the coupon rate
How is floor activity tracked in the NYSE?
There are DMM posts where orders can be executed at each of the counters.
A Treasury yield curve plots Treasury interest rates relative to what?
Time to maturity
Because of __________, the present value of a bond can vary a lot.
Time to maturity
This is the number of years until the face value of a bond is paid.
Time to maturity
What is on the horizontal axis of a term structure graph?
Time to maturity
What information is freely available from NASDAQ?
Timely, accurate source of price quotations
This is the amount of money that changes hands in trading.
Trading volume
A financial market is _____________ if it is possible to easily observe prices and volume.
Transparent
What are some good examples of zeroes?
Treasury bills and principal-only treasury strips
What is the exception to the fact that bonds are typically difficult to find up-to-date prices on?
Treasury securities
This reflects the term structure of interest rates for treasury bonds.
Treasury yield curve
_____________ depend on the same three components as term structure
Treasury yields
(T/F) Unless declared by the Board of Directors, dividends are NOT a liability.
True
These bonds are exempt from state income taxes.
US Treasury bonds
These bonds are usually just ordinary coupon bonds with no default risk.
US Treasury bonds
What is an example of an Aa rated bond?
US sovereign debt
A normal yield curve is _______ sloping.
Upward
If the long term interest rate is greater than the short term interest rate, then the term structure is ___________.
Upward sloping
What is the primary bond valuation principle?
Value of financial securities = PV of expected future cash flows
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
Voting by proxy
What are two ways you can discount real cash flows?
With the real rate, or with nominal cash flows & real rate.
If you know the price of one bond, you can estimate its _____ and use that to find the price of another bond of similar risk.
YTM
The ____________ is calculated assuming that all payments will be made.
Yield curve
The interest rate required in the market on a bond
Yield to Maturity
Traders are concerned with changes in the bond's price due to the _______ rather than the ___________.
Yield, predictable coupon payments
These bonds pay no coupons at all, and are sold for far less than their stated value.
Zero-coupon bonds
Coupon rates and YTM are ________ rates.
annual
The coupon of a WSJTB refers to the...
annual coupon rate
Bonds issued by the US government...
are considered to be free of default risk
When the YTM = coupon, the bond trades ________
at par
If investors think the rate of inflation will rise in the future, then the long term nominal rate ____ the short term nominal rate.
be greater than
A bond that is payable to whomever has physical possession of the bond is said to be in:
bearer form
A _____ is effectively an "IOU"
bond
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:
call premium
Moody's Baa and S&P BBB
capacity to pay is adequate, adverse conditions will have more impact on the firm's ability to pay
Moody's Aaa and S&P AAA
capacity to pay is extremely strong
Moody's A and S&P A
capacity to pay is strong, but more susceptible to changes in circumstances
Moody's Aa and S&P AA
capacity to pay is very strong
What is "g" equal to?
capital gain yield
What does g stand for in the required return formula?
capital gains yield
A bond is quoted at a price of $1,011. This price is referred to as the...
clean price
YTM = ___________ + ______________
current yield + capital gains yield
The maturity of a WSJTB refers to the...
date of maturity
Car dealerships are to ____________ as real estate agencies are to _____________.
dealers, brokers
Bond ratings are only concerned with the possibility of ___________; they don't address ______________.
default, interest risk
When the YTM > coupon, the bond trades at a __________
discount
On a WSJ Treasury table, if the ask price < 100%, the bond is....
discounted
How do you find the semiannual coupon rate from a WSJTB chart?
divide the "coupon" percentage by 2
Expectations of falling interest rates will result in a(n) ____________ sloping interest rate risk curve.
downward
The expectation of falling inflation will result in a(n) _____________ sloping term structure.
downward
DEBT VS. EQUITY: An all ______ firm cannot go bankrupt merely due to debt.
equity
The shape of the yield curve is influenced by interest rate __________
expectations
Because interest rates tend to ______ in response to an economic slowdown, a(n) _________ yield curve is often interpreted as a negative forecase for economic growth.
fall, inverted
A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):
floor broker
For a premium bond, YTM is ________ than the market rate
greater than
A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
greater than 7 percent
Callable bonds generally...
have a sinking fund provision
How have junk bonds been "rebranded"?
high yield bonds
A normal yield curve has long term yields that are ________ than short term yields
higher
If the real rate of interest rises, all interest rates will tend to be __________.
higher
All else constant, a bond will sell at a premium when the coupon rate is _____ the yield to maturity.
higher than
The real rate of interest is represented on the term structure graph as a...
horizontal line
This is an agreement between borrowers and creditors
indenture
The benchmark PE ratio is often a(n) _____________ or based on ___________.
industry average, company's own historical values
What does "h" stand for in the Fisher effect formula?
inflation rate
The ________________ offers higher yields to compensate for the illiquidity of bonds.
liquidity premium
The bond market has __________ transparency, while the NYSE has _________ transparency.
little to no, 100%
Bonds have a (high/low) daily volume of single issues.
low
Moody's Ba and B, and S&P's BB and B, are considered
low grade
An inverted yield curve has long term yields that are _________ than short term yields.
lower
All else constant, a bond will sell at a discount when the coupon rate is _____ the yield to maturity.
lower than
For a discount bond, the YTM is __________ than the market rate.
lower than
Staggered elections make it (easier/more difficult) for a minority to elect a director.
more difficult
Debt of state and local governments
municipal securities
This rate has not been adjusted for inflation
nominal rate
Interest rates that include an inflation premium are referred to as...
nominal rates
The NYSE has been especially successful at attracting and processing...
order flow
The real rate of interest influences the...
overall levels of interest rates
On a WSJ Treasury table, if the ask price > 100%, the bond is....
premium
When the YTM < coupon, the bond trades at a ___________
premium
For a small fee, the NASDAQ allows users to view ________ from all market makers, and access to ________, the highest bid quotes and lowest asked quotes for NASDAQ-listed securities.
price quotes, inside quotes
Protective covenants are primarily designed to...
protect bondholders
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
protective covenants
This rate has been adjusted for inflation
real rate
What does "r" stand for in the Fisher effect formula?
real rate
When the _________ and ___________ are relatively high, there will be a significant difference between nominal rates based on the precise Fisher effect and the approximation.
real return, expected inflation
Bonds of similar ____ will be priced to yield the same _______.
risk, return
WSJ Treasury bonds are all (semiannual / annual)?
semiannual
Low grade bonds are considered
speculative with respect to capacity to pay
In ______________ elections, only a fraction of the board of directors are elected at a time.
staggered
The pure time value of money is known as the:
term structure of interest rates
Federal government debt
treasury securities
Expectations of rising interest rate risks will result in a(n) ____________ sloping interest rate risk curve.
upward
The expectation of rising inflation will result in a(n) ___________ sloping term structure.
upward
The rate of inflation's impact on term structure is represented on the term structure graph as a...
upward or downward sloping straight line
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:
yield to maturity
